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º SPECIAL REPORT LUXURY DECEMBER 13TH 2014

Exclusively for everybody

20141213_SRluxury.indd 1 02/12/2014 17:18 SPECIAL REPORT LUXURY

Exclusively for everybody

The modern luxury industry rests on a paradox—but is thriving nonetheless, says Brooke Unger AT THE TRANG TIEN PLAZA shopping mall in Hanoi, Vietnam’s capital, on some evenings a curious spectacle unfolds. Couples in wedding fin- erypose forphotographsin frontofilluminated shop windows, with Sal- vatore Ferragamo, and Gucci offering the sort of backdrop for romance more usually provided by the sea or the mountains. The women are not wearing Ferragamo’s ara pumps, with their distinctive

bows, or toting uitton’s subtly monogrammed . They cannot

¢ afford them. Tr¡an Cuon, who assembles mobile phones at a Sam- sung factory, posed with his fiancée in a brown and that cost him the equivalent of $150. Some day he hopes to become a customer in the mall. Until then, he will proudly display the photos in his home. To stumble across an out- post of European luxury in a rela- tively poor and nominally social- ist country is not all that sur- prising. Luxuries such as silk have travelled long distances for many centuries, and even modern lux- CONTENTS ury-goods makers have been pur- suing wealth in new places for 3 Definitions more than a century. Georges A rose by many names uitton, son of Louis, the inven- tor of the world’s most famous 3 History Saintly or sinful? luggage, showed off the com- pany’s flat-topped trunks (better 4 The business case for stacking than traditional Beauty and the beasts round-topped ones) at the Chica- go World’s Fair in 1893. The oil- 6 China Beyond bling rich Middle East has been a mag- net for expensive foreign trinkets 7 Developing markets since the 1960s. The Japanese be- The clamour for glamour came insatiable consumers in the

1970s. Today, two in five Japanese 8 Demographic trends

¢¡ £Marques for millennials are thought to o uitton pro- duct. And nowitisChina’sturn to 10 The future of luxury lap up luxury. Experience counts ACKNOWLEDGMENTS As luxury-goods sales have expanded geographically, they have In addition to those mentioned in also spread across the social scale. When created her No. 5 the text the author would like to perfume in the 1920s she reserved it forher best couture clients, but in the thank the following: John Ayton, followingdecade she sold it in smallerbottles so that more women could Annoushka; David Baxby, Global Blue; Maria Cristina Buccellati; afford it. ’s “Les Must” in the 1970s put the brand within Charlotte Chiene, Dorchester Collec- reach of consumers who could only yearn for Panthère and tion; Timothy Coghlan, Savills; Tankwatches. Many other brands followed Cartier’s sortie du temple (de- Edward Dolman, Phillips; Liz Flora, scent from the temple), seeking to broaden their appeal while retaining Jing Daily; Katja Graisse, Balistik Art; Nicolas Hieronimus, L’Oréal; their cachet. Not all succeeded. Jonas Hoffman, SKEMA Business Over the past 20 years the number of luxury-goods consumers School; Paul James, Starwood worldwide hasmore than trebled to 330m, accordingto Bain & Company, Hotels; Joshua Kane, ; a consulting firm. Their spending on expensive jewellery, , cloth- Andrew Keith, Lane Crawford; Robert GDP Lafranco, Bloomberg; Marcus ing, handbags and so on has risen at double the rate of global . Most Margulies, Marcus Watches; Mario ofthese newbuyersare notthe veryrich butthe merelyprosperous, with A list of sources is at Ortelli, Sanford C. Bernstein; incomes ofup to €150,000 ($188,000). Shares oflisted luxury companies Economist.com/specialreports Manfredi Ricca, Interbrand; Antoine have far outperformed those ofother companies (see chart, next page). de Riedmatten, Deloitte; David Consumers’ rush to quality has created at a rate that Sil- An audio interview with

Sadigh, Digital Luxury Group; the author is at ¢

Roberto Stern, H. Stern; Elizabeth ic ¤alley might envy, especially among the main shareholders ofluxu- Economist.com/audiovideo/ Walker, James Purdey & Sons. ry conglomerates that have gathered together many of the best-known 1 specialreports

The Economist December 13th 2014 1 SPECIAL REPORT LUXURY

as they get more expensive because they confer yet more status. And the margins even on lesserluxury goods are much bet- ter than on mass-market items. Luxury companies like to set their own agenda. Theircreative directors over- see both the development of new pro- ducts and the way they are presented in magazines, shop windows and online. “We are not going to let people influence the vision,” says PatrickAlbaladejo, depu- ty managing director of , a French luxury so august it claims not to have a marketing department. Luxury companies often get the mostattention forthe thingstheysell least of. , Chanel’s creative direc- tor, made headlines this year by sending his models down a catwalk decked out as a grocery shop. But “the bread and butter of the company are chemicals,” explains Armando Branchini of the Altagamma Foundation, which represents Italian lux- ury firms. Luxury perfumes and cosmet- ics are thought to account for over half of Chanel’s business. Diageo, a big drinks company, has a “Reserve” division that gives special at- 2 brands. They include Bernard Arnault, a French tycoon who con- tention to its priciest tipples, such as Johnnie Walker Blue Label trols LVMH, owner of Louis Vuitton, Moët & Chandon cham- whisky.They are marketed through the patient cultivation ofthe pagne and a host ofother brands, and his rival François-Henri Pi- coolest bars and influential “advocates”. “You need to be a nault, whose group owns Gucci, a big Italian in relationships when it’s about luxury,” says James Thomp- -goods maker. Nick Hayek’s Swatch Group and Johann son, who runs the division. Rupert’s (Cartier’s owner) are powerhouses in Luxury’s lens does odd things to the map as well. Europe is watches and jewellery. Among the owners who have made for- still the pre-eminent maker; its brands account for 70% of the tunes from selling stakes to investors in the past few years are world’s luxury consumption. Germany matters in cars and Brunello Cucinelli, whose eponymous company makes casual- yachts, but the real powerhouse is Italy, which serves as the chic at serious prices, and Remo Ruffini, a fellow Italian workshop for French and leather goods as well as its who floated Moncler, a maker ofdown . own. Luxury is “one of the few industries where Europe has a Personal are just one small corner of this em- sustainable competitive advantage”, says Michael Ward, manag- pire of opulence. Upmarket options can be found in industries ing director ofHarrods, a posh London department store. Ameri- from health care to banking, though most analysts leave such ca is both an underexploited market, given its wealth, and a base things out of their reckoning. Using consumers’ own perception for brash competitors such as Coach, and Kate of what constitutes luxury goods and services, the Boston Con- Spade, which are challenging established European brands with sultingGroup reckonsthat$1.8 trillion wasspenton such items in a more affordable take on luxury. China, alreadya voracious con- 2012. The biggest category is travel, followed by cars and then sumer, is just beginning to stir as an exporter. personal luxury goods. Bain comes up with a smaller sum for a similar spread of sectors (see chart). But luxury’s boundaries are The pope doesn’t wear fuzzy and hotly disputed. Of late, though, the champagne has gone a bit flat. The war This special report will concentrate on personal goods, in Ukraine and the sanctions imposed on Russia in response which face the tricky task of trying to achieve global scale while have put offrich citizens ofthat country, among the giddiest new maintaining the artisan roots that give them rarity appeal. Ultra- consumers. The Japanese went on a spree early this year ahead expensive cars will make only a brief appearance, and yachts of a rise in value-added tax, then stopped spending. The Ebola will just sail by on the horizon: globally, only 14,000 people are epidemic in Africa and pro-democracy protests in , able to afford a really big one. But the report will include such where Chinese mainlanders do much of their shopping, have fast-growing“experiential” sectorsashotelsand wine, which are unnerved consumers. Most important, slower economic growth growing faster than things to buy and own. and the anti-corruption campaign mounted by Xi Jinping, Chi- To view the world through the lens of luxury is to see it na’s leader, have dampened the spirits of Chinese shoppers, subtly altered. Some of the normal rules do not apply to luxury- who now account fornearly a third ofthe global demand forper- goodsmakers, even though in manywaystheyare similar to oth- sonal luxury goods. The share prices of recently listed luxury erconsumer-goodscompanies. The costofproduction isnot usu- companies have fallen by a quarter this year. After two decades

ally a prime concern and capital investment is generally modest, when annual growth averaged nearly 6%, the rate this year will

§

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¦¨ ¥ except for watches. A really prestigious item c ¥eblen be just 2%, predict Bain and Altagamma. good”, named afteran American economist born in the mid-19th These passing crises come on of more profound century who noticed that demand for some goods actually rises changes. One of them is a shift from “having” to “being”, espe- 1

2 The Economist December 13th 2014 SPECIAL REPORT LUXURY

2 cially in rich countries, where the well-off are becoming less Definitions keen on owning and more interested in experiencing things. Consumers in China are turning from monogrammed showi- ness to subtler elegance. Younger people everywhere have their A rose by many names own ideas about how to consume luxury, helped by social me- dia and e-commerce. Inequalityisa growingconcern from to . Last year a pope whose red were widely (but wrongly) thought to have been made by Prada, an house, gave way to one who shuns the Apostolic Palace for a Why luxury is so hard to pin down guesthouse. That captures the mood and contributes to it. Sobriety has bypassed some sectors, including fine wine WHAT EXACTLY IS luxury? The concept is both slippery and expensive cars. Yacht sales, too, are buoyant again after a and divisive, not least because so many purveyors wish to period in the doldrums in the late 2000s, and today’s yachtsmen lay claim to it. It is adjacent to excess, enjoyment of it may be- often add a helicopter or two to their order. But mostly substance speakshallowness, and those who possessitare often undeserv- is winning over style. ing. Luxury makers need to dissipate such doubts. In some ways, today’s preoccupation with sustainability As luxury has become more widespread, definingit has got plays into the hands of luxury-goods makers. With their ample harder. The language associated with it is replete with qualifiers. margins, they can afford to reduce the environmental damage It can be “authentic”, “absolute”, “aspirational” or “affordable”. theycause. “Luxurycan showthe path thatanswersthe major is- Jean Cassegrain, the chief executive of Longchamp, a leather- sues of our century,” argues Marie-Claire Daveu, Kering’s sus- goods and clothing company, positions his “optimistic luxury” tainability chief. By and large, makers of luxury goods employ brand between affordable Americans such as Coach and the

European workers rather than sweatshop serfs in Bangladesh. more upmarket Louis uitton. Parts of this universe, like haute The key trend now, says Diageo’s Mr Thompson, is “away from couture and haute horlogerie (the watchmaking version), have or- show for its own sake towards knowledge, appreciation, craft ganisations to back them up, but they leave a lot out, such as and heritage—something with a story.” 7 ready-to-wear clothing. Altagamma, which produces annual re- 1

Saintly or sinful?

Appreciation of luxury goes in circles LUXURY HAS A long pedigree. Homer’s war- “bullionist” arguments that the import of feelgood factor to the enjoyment of luxury: riors slaughtered each other for booty as luxury goods weakened the economy by “You cannot spend money in luxury without much as for glory. Priam, the Trojan king, depleting gold reserves. A century later doing good to the poor.” For these thinkers, assembled “twelve , handsome, rich Adam Smith and David Hume portrayed luxury was all tied up with commerce, liberty, brocades” and “a magnificent cup the Thra- luxury as a spur to industry and to social peace and social mobility. cians gave him once” as part of a ransom for co-operation. It is “peculiar” to “polished At the time they were writing, the the return of the body of his fallen son, and…luxurious ages” that “industry, knowl- French had already laid the groundwork for Hector. More often, though, luxury has been edge and humanity are linked together by an the modern luxury industry. Jean-Baptiste portrayed as a menace to martial spirit and indissoluble chain,” wrote Hume in his essay, Colbert, Louis XIV’s finance minister, taxed moral fibre. Christians associated luxury with “Of Refinement in the Arts” (originally called imports, offered subsidies and enforced sinful self-indulgence. In the rose window of “Of Luxury”). Samuel Johnson introduced a quality standards to promote French produc- Notre Dame, luxury is represented “as a tion of the sumptuous textiles and lace that woman titivating herself in front of a mirror”, were de rigueur at the Sun King’s court; then says Christopher Berry in his study “The Idea he pushed exports. “Fashion is to France what of Luxury”, published in 1994. the gold mines of Peru are to Spain,” he Sumptuary laws were devised over the proclaimed. But Elisabeth Ponsolle des centuries to discourage dissipation, curb Portes, boss of the Comité Colbert, France’s imports of expensive fripperies and (often club of luxury producers, says the country’s hypocritically) preserve distinctions of rank. luxury know-how goes back to the trouba-

Those of the Aztecs were particularly tough: dours of the 12th century.





macehualtin—members of the labouring Thors eblen, the economist who class—who displayed finery and precious gave his name to the sort of goods that be- objects could be put to death. The Venetian come more desirable as their price rises, had republic had three provveditori delle pompe, political grounds for sneering. Luxury is a luxury police who ensured that sumptuary form of waste that arose to confer status on strictures were observed. Rules in the Toku- an essentially useless class, he argued in “The gawa (Edo) period in Japan specified what Theory of the Leisure Class”, published in sort of toys parents could give their children. 1899. “Conspicuous consumption of valuable

Attitudes changed with the Enlight- goods is a means of reputability to the gentle-  enment and the advent of liberal economics. man of leisure.” Bot eblen’s and Hume’s In the 1600s British merchants rejected Sun King and ideas remain potent.

The Economist December 13th 2014 3 SPECIAL REPORT LUXURY

2 ports on luxury along with Bain, applies a simple price standard: The business case a luxury costs €850 or more. But that leaves the question of why you might want to spend that kind of money. Brunello Cucinelli, who turned his Beauty and the beasts idea of enlivening cashmere with bright colours into a clothing business with revenues of €322m and a stockmarket capitalisa- tion of around €1billion, provides one answer. He runs his com- pany from Solomeo, a timeless village perched on an Umbrian hilltop. There, Mr Cucinelli has set up schools dedicated to crafts Think global, act artisan such as tailoring and gardening and a “neo-humanist academy”. Mr Cucinelli considers his products to be “absolute luxu- YOU MIGHTEXPECTthe headquarters ofLVMH on the Av- ry”, and not many would disagree. A men’s knitted enue Montaigne in to show offits full range of brands, from Mongolian cashmere can cost more than €1,600, not least from (cosmetics) to Moët & Chandon (champagne). because it is made in his hilltop Utopia. Italian manufacture is They do get some play in a small museum housed in the lobby. not merely an assurance of quality; without it the business Butup on the ninth floor, where MrArnaultpresidesover hislux-

would lose its point, Mr Cucinelli suggests. Europe is of “inesti- ury empire, there is tribute to just one, Louis uitton. Two paint- mable value” to the company and, he believes, to its customers. ings of the LV monogram by hang opposite He adds to the aura by insistingthat his workers take a 90-minute the reception desk, and a little pyramid ofhandbags sits nearby. lunch break. With MrCucinelli sellingit, that cardigan will feel as The decor tells you something about Mr Arnault’s group.

good to the soul as it does to the touch. Louis uitton is the company’s biggest brand by far, accounting

All luxury makers like to tell some version ofthis story, and forabout a third ofits sales and nearly halfits profit. ALouis uit- some have longerhistories. Breguet, partofSwitzerland’sSwatch ton shop window is the first close encounter with luxury for Group since 1999, boasts that Napoleon was one of the “most many people, and the brand often pioneers new markets. Its first faithful clients” for its watches. Karl Lagerfeld, a pony-tailed Ger- shop in China opened in 1992. It is “the number one brand in the man fashion designer, is the spiritual son of . Bur- world and will stay so”, Mr Arnault declares. berry, which was founded in 1856, calls itself an “old new com- Critics sniff that canvas creations like the Neverfull tote, pany”. It is “the combination of timelessness and modernity spangled with logos and sold by the hundreds of thousands, are [that] makes these brands successful”, says Mr Arnault ofLVMH. commodities, not luxury. “It’s difficult to say you’re a luxury brand ifeveryone on the planet can buy your product,” says Bar- Tell me a story bara Coignet of1.618, an organisation that promotes luxury with Craftand a sense ofplace are almost always part of the nar- an environmental and social conscience. Misgivings about ex- rative. Hermès attractively defines luxury as “that which can be cessive scale extend to the publicly listed companies that own repaired”. The company keeps expatriate repairers in centres the brands, such as LVMH, Kering and Swatch. “Real luxury is such as New York, Shanghai and Tokyo. Vertu, a company that slowly fading away because of the big luxury groups,” com- makes handsets costing ten times as much as an iPhone, justifies plained Lapo Elkann, an Italian entrepreneur, at a recent Finan- the price by pointing out they are “handmade in England”. cial Times conference on luxury. “They standardise the aesthet- For some ofthe most discerning customers, the products of ics ofbrands to generate more profits forshareholders.” pretty much any company you have ever heard of fall short of The holding-companymodel isnotthe onlysuccessful one. real luxury, which is defined by extreme rarity. Breguet produces Chanel belongs to the secretive Wertheimer family; Hermès is perhaps 15,000 watches a year. Greubel Forsey makes a mere publicly traded but managed by its founding family. Both have 100, one for each employee. Rolls-Royce makes 4,000 cars a year, largely avoided the criticism that bedevils Big Luxury. Italy’s lux- 1 many of them to order. But they are commonplace compared with the 38 that will roll out of the “atelier” of Pagani, an Italian manufacturer, this year. The quality of such “meta-luxury” ob- jects may be no better than those produced by slightly less exclu- sive marques, but they come over as more intimate and closer to their creators. At the other end of the scale, companies bristle when their credentials are questioned because their prices are less exalted or they manufacture in China. Coach, which mainly sells leather goods, usesthe same materialsasEuropean brands, butits soul is in New York, its creative hub. Manufacture is a collaboration be- tween designers there and craftsmen in China, says Coach’s boss, Victor Luis. He thinks the idea that luxury and approach- ability don’t go together is “almost offensive”. Similarly, Long- champ’s Mr Cassegrain argues that it is “almost racist to charac- terise made in China as bad”. The broad conclusion from all this may be that luxury is in the eye of the beholder. To qualify, it seems to demand a stretch from those who would claim it. For the rich, that exertion may take the form not of scattering money but of spending time or learningaboutan objectoran experience. The acquisition oflux- ury is both an attempt at transcendence and an act of appropria- tion, like the picking of the apple in the garden of Eden. Perhaps that was mankind’s first luxury good. 7

4 The Economist December 13th 2014 SPECIAL REPORT LUXURY

There are gent than of jewellery, so most brands li- cense that side oftheirbusiness to special- good ists such as L’Oréal and Procter & Gamble. reasons for In “soft luxury” categories like hand- and clothes, where production is bigness, low-tech and costs are variable, the bene- both for fits of scale are in retailing and marketing. Key money paid up front to open a shop brands and can cost up to £10m ($16m) on London’s for the Bond Street; the cost of fitting it out comes on top of that. Annual rent can be £1m. A companies big brand, or one belonging to a strong that own group, can wait to breakeven. A small one risksbankruptcyifsalessag, says MrBran- them chini of Altagamma. To secure prime space in shopping malls, it helps to belong to a holding-company convoy led by a large brand. Perhaps equally important is the big groups’ clout with publishers of glossy magazines and “key opinion leaders” whose fashion-packed blogs, videos and Instagram streams reach millions of fol- lowers. Media spendingis correlated with traffic in stores, so large brands can open bigger and better ones. Luca Solca of Ex- ane BNP Paribas, an investment , has dubbed this the “mega-brand virtuous cy- cle”. Most big companies have become re- tailers in their own right. This gives them 2 ury houses are mostly stand-alone companies, controlled by better margins, along with control over the presentation of their their founding families even when they are publicly traded and wares and markdowns on unsold stock. By this measure, Louis professionally managed. Young firms often try to keep their dis- Vuitton is ahead of the others: it sells only through its own net- tance from the big groups, either turning to private-equity inves- workof462 points ofsale. tors or staying independent. British brands are “very reluctant to In theory at least, the groups help the smaller brands they take outside investment”, says Michelle Emmerson, chief execu- acquire to grow faster. UnderKering’s tutelage , an tive ofWalpole, an association ofBritish luxury firms. Italian leather-goods maker renowned for the woven intrecciato The soft-spoken Mr Arnault has become France’s richest of its handbags and shoes, has gone from being a niche brand to man by overcoming such resistance. His career in luxury began revenues of more than €1 billion. Kering encouraged Christo- in 1984 when he picked up , a venerable house, pher Kane, a British fashion designer who is part of its stable, to in the bankruptcysale ofan industrial group. Afewyears laterhe open his own stores, and guided Italy’s Brioni to move out of wrested control ofLouis Vuitton from Henry Recamier, who had women’s wear and into men’s accessories and shoes. Small married into the founding family and expanded the brand’s two brands also benefit from centralising the boring bits of the busi- shops into a network of 125. Other maisons, such as Céline and ness, such as logistics. The brightest prospects in the industry are , followed into Mr Arnault’s clutches. With Dior and for “small brands in big conglomerates”, says Julian Easthope of Louis Vuitton he took production and distribution back from li- Barclays Capital, an investment bank. cence- and franchise-holders to boost their cachet. Mr Arnault thinks LVMH’s main contribution to its maisons In 1999 he lost a battle for control of Gucci to his arch-rival, is its ability to recruit talented managers. In stand-alone compa- Mr Pinault. Mr Arnault’s stealthy acquisition of a stake in Her- nies “a bright person is rapidly blocked,” he says. At LVMH he or 1 mès, revealed in 2010, appalled conservative Parisians. His inter- est was purely financial, he insisted; in September he agreed to distribute the shares to LVMH’s investors, giving them (and him- self) a handsome profit. But his image as a monogrammed Ma- chiavelli persists. “Arnault never met a brand he liked that he didn’t want to make bigger,” comments Hélène Le Blanc, a luxu- ry-industry consultant. There are good reasons for bigness, both for brands and for the companies that own them. Listed European luxury groups have expanded their global market share from 39% to 42% over the past five years whereas independents’ share has dropped from 50% to 43%. Luxury, ironically, benefits from economies of scale. The Swatch Group dominates Swiss watchmaking, with a 45% market share, in part because the industry involves large in- and high fixed costs. Cosmetics are the most high-tech part ofluxury and their distribution is more akin to that ofdeter-

The Economist December 13th 2014 5 SPECIAL REPORT LUXURY

2 she can move from fashion to jewellery to wine. The groups are China looking forproductively split personalities, with “the capacity to be inspired by creativity in a rational way”, as Mr Arnault puts it. Kering is on the lookout for similar qualities. “When the fashion Beyond bling show is over, the business side takes over,” says Jean-François Pa- lus, its managing director. Occasionally this gets out of hand. The point of the big groups is to foster profitable growth, but too much of it or the wrong sort can tarnish a luxury brand. In 2004 Gucci set itself a Tastes are changing, but appetites remain keen goal of doubling its sales within eight years. To achieve that, the companyproduced manymore canvasdouble-G-dappled hand- IF LUXURY MEANS Bond Street or the Place Vendôme for bags than was healthy for the brand. you, Hong Kong comes as a shock. Billboards touting Swiss The trickis to polish a brand to a high sheen and then to dis- watches and Italian shoes dominate the skyline. At shopping seminate the glow through the full product range without letting centres, high-wattage façades compete for space. Louis Vuitton’s it dull. Hermès and Chanel have lately been better at this than lights square up against ’s cinema screens. the big groups’ main brands. That is not because they are small: This Vegas-like glitter reflects the novelty of luxury in Chi- Hermès has 315 stores and €3.8 billion in revenue, and Chanel’s na, and the country’s new importance to luxury. Today nearly sales are three-quarters the size of Louis Vuitton’s. But each has one-third of all personal luxury goods sold worldwide are its own knackforteaming exclusivity with accessibility. bought by Chinese consumers. Their spending is divided more or less equally among the mainland, the Chinese-speaking terri- Managing the mystique tories of Hong Kong, Macau and Taiwan, and the rest of the Hermès starves the market. Customers have to wait six world. Mainlanders become familiar with the brands through months or more to buy its most famous products, its Kelly and marketing and shopping centres at home. When they visit Hong Birkin handbags, each one handmade by a single craftsman. Al- Kong they are “on a mission”, says Pascal Perrier, chiefof Burber- though Hermès makes an estimated 70,000 Birkins a year, prices ry’s Asian operations. The gaudy signage helps guide them to on the secondary market can be 50% above the retail price. Her- shopping destinations they have already picked out. mès’s growth is limited by the scarcity of high-quality raw mate- Chinese shoppers came to the rescue when the financial rials and of craftsmen, who take two years to train up, points out crisis in 2008 cast a pall over luxury. Since then 70-80% of global Mr Albaladejo. Hermès sells plenty of less expensive products, growth in the sector has come from China, according to Barclays including , and towels. But €500 will merely buy Capital. Once-fading European brands, such as Britain’s Aquas- you an expensive , not a cheap handbag. cutum, which makes traditional clothing, have sought second Chanel will not sell a handbag for much less than €2,000 livesthere. Others, like Lancôme, a cosmetics-maker, are present- but moves millions of €30 lipsticks. Few brands stretch as grace- ing themselves as more luxurious there than they are seen at fully from mass production to haute couture. Many of its cosmet- home. “Now our culture is so imbued and involved in good and ics are made by Intercos, a contract manufacturer, but the com- bad waysbyluxurypenetration,” saysYi Zhou, an artistwho has pany also provides a haven for endangered crafts still vital to the collaborated with luxurybrands. “Instead ofthe theatre we go to most exalted tiers of fashion. Paraffection, a subsidiary, houses store openings…I feel like I live in an airport.” century-old firms that specialise in things like embroidery and The rush to China intensified after the 2008 Beijing Olym- making artificial flowers, both for Chanel and other brands. The pics, with luxury brands swarminginto shoppingmalls as fast as husbandry practised by Hermès and Chanel contrasts with the they could be built. It was a “game of space invaders”, says Er- approach taken by Italy’s , whose half-dozen wan Rambourg, a banker and author of a new book, “The Bling sub-brands each sell similar products at different prices. Dynasty”. PresidentXi Jinping’scrackdown on corruption, along LVMH and Kering have both been burnishing their biggest with slower economic growth, has now changed the mood. brands lately. Since a strategic review in 2010, Gucci has reduced His anti-extravagance measures amount to a mini cultural salesofitscheapesthandbagsfrom a third ofthe total to lessthan revolution. Chinese newspapers report falling sales of such del- 5%. Mr Arnault, for his part, announced an “adjustment to the icacies as hairy crab and sea cucumber as banqueting halls go 1 strategy” last year which involved a big reduction in new store openings and a greater emphasis on leather products. Customer service was also beefed up. These moves to higher ground have Nearly

slowed the big brands’ growth and conceded territory to lower-



  priced competitors. “W uitton and Gucci move upmarket, one-third of that makes more space for us,” says Longchamp’s Mr Cassegrain. all personal

But fast-growing smaller brands seem unlikely to eclipse  Louis uitton. “People said in 1989 thatLouis uitton wasalready luxury too big. Now it’s ten times the size,” says Mr Arnault. He is as am- goods sold bitious for it as ever. A dazzling new arts centre in Paris designed by , called the Fondation Louis uitton, opened worldwide amid a flurry of publicity in October. In a riposte to those who are bought see the LV monogram as a vulgar status-seeking symbol, the company commissioned six “iconoclasts”, including Mr Gehry, by Chinese to come up with playful new designs for it. Mr Lagerfeld (who is consumers creative director of LVMH’s label as well as of Chanel) cheekily devised a punchbag with matching gloves and a to house them. The designs are now on display at most of Louis uitton’s flagship stores, including the one in Shanghai. 7

6 The Economist December 13th 2014 SPECIAL REPORT LUXURY

born in the 1980s and 1990s. Theyare the single focusofattention for their parents and often two sets ofgrandparents, giving them

access to plenty of cash. Another, potentially huge, market is

 

women, whose “vision and status” was changed by M e- dong, says Pierre Denis, chief executive of Jimmy Choo, whose stilettosfeatured in “Sexand the City”. Theirnewself-confidence translates into sales. And even if growth rates are slowing, there will still be more people with more disposable income. Spend- ing on luxury by the rich (households earning at least €75,000) will nearly quadruple between 2012 to 2020, according to Exane BNP Paribas. But it will be dwarfed by the spending power of merely affluent households, which will double to €90 billion and account for 70% ofluxury consumption. eteran consumersare movingfrom veryfamousbrands to somewhat less familiar ones. In a survey ofconsumers in Beijing and Shanghai carried out by Bain last year, Hermès and Prada were found to have displaced Louis uitton and Gucci among

the three brandsthatconsumerswanted most, and Burberry and 

Botteg eneta had entered the list of the most popular ten. As 2 quiet. Hotels have asked to have stars knocked off their ratings. shoppers become more price-conscious, affordable American One airline, China Southern, rebranded its first-class cabin “busi- brands are making inroads. Coach is advancing into second-tier ness class”. Paul & Shark, an upmarket Italian clothing brand, cities and Kate Spade is just getting started in China, a “very big used to take corporate orders for 300 polo at more than opportunity”, says its chief executive, Craig Leavitt. A fad for all 3,000 yuan ($490) apiece, to hand over as gifts. Those days are things South Korean has also boosted brands such as Sulwhasoo 1 over, says Alice Wong of ImagineX, which operates the company’s shops in China. European brands that catered to pre-Xi giving and guzzling suffered most. The clamour for glamour In the first nine months of this year ex- ports to China of Swiss watches, which had become a common ornament on the China is not the only growth story wrists of public officials, were more than 10% down on the same period in 2012. “FOR NIGERIANS,” SAYS John Obayuwana, but that is two-and-a-half times as much as Sales at Rémy Martin, maker of $2,500-a- “the bigger the logo the better.” Mr Obayu- three years ago. Half of Latin America’s bottle Louis XIII cognac, plunged 13.4% in wana owns Polo Luxury Group, a chain of luxury sales are in Mexico, in part because the half-year to September 30th. A slower shops in Nigeria and Ghana selling things that country has slashed duties on imports. economy has also reduced the growth in like Swiss watches and pens. His Brazilians, who face higher tariffs, tend to the number ofnewly affluent families, de- rich initial customers have been joined by shop in Miami. fined as those having just entered the in- middle-class consumers with a penchant for Oddly, for all its wealth, even America come bracket of €15,000-75,000 a year. It European luxury. Nigeria is a difficult mar- is a developing market of sorts for European dropped from 6m in 2010 to 4m in 2012. ket, with shoddy infrastructure and few luxury-goods makers. It has 30% of the The luxury market in mainland Chi- decent shopping malls. So for the foresee- world’s high-net-worth individuals (people na, worth $18.9 billion in 2013 (see chart 3), able future Nigerians will do most of their with more than $1m in liquid assets) and will shrink for the first time this year, pre- upmarket shopping at emporia like Harrods nearly a quarter of global GDP, but consumes dicts Bain. Still, few brands are thinking of in London, where they outspend Americans. less than a fifth of the world’s personal giving up. Mr Arnault says it will remain But as emerging countries get more prosper- luxury goods, notes Olivier Abtan of the “one of the most promising markets”. But ous, they are becoming increasingly impor- Boston Consulting Group; and its consumers it is becoming more complex, more so- tant to luxury-goods makers. are younger than those in Europe or Japan. phisticated, more international and hard- The 15 fastest-growing emerging North America is “probably the safest growth er to navigate. markets will provide 90% of the growth in driver we can imagine”, says Michele Norsa, Luxury in China began as a male-ori- consumption of luxury beauty products and chief executive of . ented pursuit, centred on liquorand wrist- women’s wear over the next ten years, says For small luxury houses, it may be watches, but is now becoming more femi- Nathalie Remy of McKinsey, a consultancy. better to pursue a modest share of a slow- nised, with handbags, shoes and fashion China will account for nearly half that growing mature market than to leap into featuring strongly. Experienced consum- growth, which leaves plenty of opportunities fast-growing emerging economies, says Ms ersare graduatingfrom blingto sophistica- in other developing countries. Whereas Emmerson of Walpole British Luxury. Lots of tion with a speed that Mr Arnault de- makers of packaged consumer goods must Europeans own luxury goods but buy them scribes as “spectacular”. But many fan out across entire countries to reach their infrequently. Mesmerised by the dynamism Chinese idiosyncrasies will persist, in- markets, luxury makers can concentrate on of developing markets, luxury brands are cluding a penchant for shopping abroad the main cities. turning Europeans off by pushing up prices and a big discount market that mingles the South-East Asia is “a half-China”, says and churning out stylish but ephemeral real with the fake. Luxury brands have to Mr Cassegrain of Longchamp. For now, the designs, argues Ms Remy. Europe could be “a workout how to cover that range. inventor of the folding Le Pliage tote land of opportunity” if only luxury-goods One promising group of consumers does only 6% of its business in the region, makers would seize it. is the offspring ofthe one-child-policy era,

The Economist December 13th 2014 7 SPECIAL REPORT LUXURY

2 (which makes cosmetics). The shift to niche brands should not be exaggerated. “Only really fashionable girls buy Céline and Fendi bags,” says Cheng Yan, whose Shiliupo Report (the name means something like very gossipy grandma) has160,000 subscribers on WeChat, a so- cial-network and messaging service. First handbags are “always with a logo”, and Louis Vuitton’s remain the most popular. “Luxury brands had a very easy ride” in China, says Em- manuel Hemmerle, a headhunter based in Shanghai. “Now they have to think.” The first generation of luxury-goods managers spent their time negotiating with landlords, who decided which brands would occupy their shopping malls (and gave preference to Vuitton, Gucci and Chanel). The new climate demands execu- tives who are good at visual merchandising and customer ser- vice. It is telling that the newish chief of Louis Vuitton in China, Christophe Sadones, has come from the hotel business. Why pay more? However tempting the displays at Beijing’s Shin Kong Place and Shanghai’s Plaza 66, Chinese consumers will do most of their shopping elsewhere. Luxury-goods prices in China are 40-50% higher than in Europe, in part because ofhigh import du- ties and consumption taxes. The Chinese are keen bargain-hunt- Demographic trends ers, so they buy abroad or on the internet. Last year the Chinese took some 100m trips outside the mainland, many of them to such destinations as Hong Kong’s Marques for millennials Harbour City, ’s Fifth Avenue and Milan’s Via Monte Napoleone, armed with detailed shopping lists. In Paris, buses bearingChinese tourists deposit them at , a de- partment store. Two-thirds of Chinese visitors to Britain in 2011 went to Bicester Village, an upmarket discount mall near Oxford. Young people choose and buy differently

Sightseeing is a secondary concern. Mainlanders in Hong Kong

 spend 73% oftheir budget on shopping, says Mr Rambourg. THE MOST CO !ket at London’s half-yearly fash- This is bound to increase. According to Mr Rambourg, cur- ion weeks is to Burberry’s Prorsum show, where the British rently just 4% ofChinese hold passports, compared with roughly trench -maker presents its upmarket ready-to-wear clothing. 30% of Americans and 70% of Britons, but numbers are growing Christopher Bailey, the brand’s chief creative officer and CEO, by10m-15m a year. A relaxation ofvisa rules is likely to lure more likes to surprise his audience. At the birds-and-bees-themed un- Chinese to Britain and America. Swiss watchmakers were puz- veiling ofhis women’s wear forspring and summer 2015, held in zled to see a spike in American sales in August, normally a slow September in London’s Kensington Gardens, the sartorial novel-

time ofyear; then theyrealised the buyerswere wealthy Chinese ty was an indigo wasp- . The digital novelties

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dropping off their children at university. Even at home the Chi- included a highlightst "ouTube thatletviewerszoom in to nese shop on the move. Just halfofall sales in Shanghai are to lo- focus on various aspects of the show, such as the music. Twitter cal residents. used the occasion to launch in-tweet purchasing forluxury. Stay-at-home bargain-hunters have a plethora of online This is a big change from the traditional model of present- choices, some of them provided by websites that co-operate ing fashion in which designs are conceived at the top, handed with the brands. Mei.com holds“flash sales” ofunsold stock; The down to journalists and buyers at fashion-week set-pieces and Outnet, the discount arm of Britain’s Net-A-Porter fashion web- pop up in the shops four or five months later. Technology has

site, serves as an online outlet mall. But most of them come narrowed the distance between designers and consumers and

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through the murky channel known as daigou, which offers genu- sparked a conversa (ouTube, Instagram, WeChat and the ine products at bigdiscounts to Chinese list prices. The stockmay like have “completely disrupted” the way fashion companies come from independent shops in Europe, or in some cases from communicate, says , editor of The Business of Fash- the brands themselves, which pass goods on to independent re- ion, an online journal. sellers. Agents spirit the goods into China for a fee, usually with- This is the first of three technology-induced changes that out paying import duty. Some transactions are arranged through will profoundly affect luxury brands. The second is a shift from networks of friends but many take place online. Taobao, one of selling in physical stores to online. The third, for now only just China’s main e-commerce businesses, has a website dedicated visible in the distance, is a technology-related change in the way to daigou, g.taobao.com. Up to 30% ofluxurysalesin China come luxury goods are made. through this channel, reckons Bruno Lannes ofBain. The digital transition is running alongside a demographic Daigou outlets sometimes mix fakes with the real thing, one. By 2026 the main consumers of luxury will be millennials which is why Ms Cheng warns her readers against them. China’s (or generation Y), people born in the 1980s and 90s, says Unity commerce ministry has proposed cutting import and consump- Marketing, an American market-research firm. Brandswith pedi- tion taxes to discourage the grey market and boost domestic grees can use technology to win this age group over, as Burberry sales. But in a political climate which frowns on luxury, that is is trying to do. Newer ones can employ it to breakthrough. unlikely to happen, so black and grey are likely to remain fash- A study by the Boston Consulting Group reckons that mil- ionable colours. 7 lennials“are geared to pleasure ratherthan to possessions”, mak- 1

8 The Economist December 13th 2014 SPECIAL REPORT LUXURY

rect control of its cosmetics and fragrances business, hoping to Burberry “disrupt beauty through digital”. was among Disruption is not something that comes naturally to most established luxury brands, but when they embrace it they some- the first to times do it well. Creative directors are increasingly targeting mil-

spot lennials. The mission of Louis )uitton’s newly appointed cre- ative director, Nicolas Ghesquière, is to “reboot the monogram”, millennial making it less ofa logo and more ofa code, says Mr Briones. potential Live-streaming of catwalk shows is now common practice, asisgivingcelebritybloggersfront-rowseatsalongside editorsof the main fashion bibles. Brands feed their “communities” with streams of images on Instagram and Pinterest and Hollywood- quality videos on YouTube. Cartier’s L’Odyssée de Cartier, star- ring a bejewelled panther, has been seen 17.6m times. But the conversation between luxury makers and their public can easily take an awkward turn. Stella McCartney, a de- signer who likes to display her social conscience, got into trouble when her company’s Instagram stream featured a photo of a painfully skinny model. On receiving complaints from fans, her company removed the photo and declared its enthusiasm for people ofall colours, shapes and sizes. Actually selling luxury online is more difficult than talking 2 ing them less inclined to buy things. They are assertive, sceptical about it. Even brands that dabble in it doubt that any website can of authority and nonconformist, none of which bodes well for match the experience of shopping in a boutique. “To buy a luxu- traditional luxury brands. On the other hand, photo-sharing so- ry product you have to touch it,” says Mr Arnault. Many compa- cial media like Instagram put a premium on appearance, argues nies offer just a small range of their products for digital sale, and Mr Denis ofJimmy Choo, which should be a good thing for com- some none at all. panieslike his. In the same vein, EricBriones, a French consultant But e-commerce is making inroads. Net-A-Porter, a website who has written a bookabout the millennials’ relationship with that pioneered internet sales of upmarket fashion, has a custom- luxury, says they consume it “without remorse”. er base of6m women and has persuaded some 650 brands to of- But not uncritically. Brands must prove that their products fer their wares on its platform. For now only about 8% ofall luxu- are worth the price, notrelyon mystique alone. Generation Y-ers ry sales are online, but they are growing at a rate of25-30% a year, tend to be unimpressed by logos but entranced by “codes”, sub- says Claudia D’Arpizio of Bain’s Milan office. Much of this is at tler ways of conveying a brand’s identity. The red soles of Chris- the expense of independent boutiques. If the share of digital tian Louboutin’s shoes and the quilting on Chanel’s 2.55 hand- sales goes much above 10%, investment in stores “will be re- bags are the sort of signs that young consumers can make their thought”, she says. own, says Mr Briones. Unhappy customers can sound off on websites such as styleforum.net. Some millennials also want Goodbye to Bond Street? luxury goods to be made in ways that damage neither workers The future is “direct to the consumer through the internet”, nor the environment. says Nathan Morse, who runs the business side of Hannah Mar- Burberry was among the first to spot millennial potential. tin, a London jeweller. It belongs to a new generation of luxury In the early 2000s Britain’s ostentatiously vulgar “chavs” (a par- houses with no hang-ups about e-commerce (and not enough ticular group of loutish lower-class youths) were sporting the moneyto open a lotofstores). Theymayhave shorthistories, but brand’s distinctive tartan plaid as their unofficial . It ap- theyhave stories. Hannah Martin’sandrogynouspiecesare fash- peared on baseball , even dogs. Angela Ahrendts, an Ameri- ioned by hand in London. can who became the company’schiefexecutive in 2006 (and has It used to take 30 years to build a global brand, says Uché recently left for Apple), made Okonkwo-Pézard ofLuxe Corp. Thanksto the internet, “nowyou the digital courtship of millen- can become global in 18 months.” That has spawned new brands nials a centrepiece of her strat- as well as business models. Bargain-hunters can turn to online egy for reviving the brand. To- outlets like The Outnet or flash-sales sites such as vente-privee day Burberry is unabashedly and mei.com. People who want to hire can try Borrow or digital. Two-thirdsofitsstaff are Steal or LuxTNT, a Hong Kong startup. Second-hand luxury is under 30 and use social media available from stylesequel and InstantLuxe. Such services have to talkboth to each other and to been around for a long time, notes Stephanie Phair of The Out- Burberry’s customers. net, but they have been “supercharged because ofthe internet”. Burberry sees its website The final challenge is to decide how farto incorporate tech- and its shops as complemen- nology into the making ofluxury, and perhaps into luxury itself. tary. It even struck a deal with Iris van Herpen, a Dutch fashion designer, uses 3D printing to Amazon to list beauty products construct her garments. makes a handbag with a on the online retailer’s site. In light and a smartphone charger. Suppose machines could stitch the six months to September Birkin bags better than the craftsmen at Hermès or etch di- 30th Burberry booked a year- als more finely than Vacheron Constantin’s guillocheurs? “The on-year rise in revenue of 14%, big gap between hand work and technology will become small- largely thanks to buoyant digi- erand smaller,” predicts Ms van Herpen. Luxury can embrace in- tal sales. It recently assumed di- novation; what it must be wary ofis obsolescence. 7

The Economist December 13th 2014 9 SPECIAL REPORT LUXURY

The future of luxury Giannini) swap ownership of a beautiful old sailing boat on the basis ofunlikely wagers. If own- Experience counts ership does become separate from enjoyment, makers of lux- ury goods will have something to worry about. That moment Providers of luxury need to offer more than expensive may not have arrived yet, but as consumers become more scepti- baubles to take advantage of a growing market cal, more discriminating and “TEN YEARS AGO you would have auctioned handbags.” more interested in experiences, Ben Elliot, the boss of Quintessentially Group, a concierge it is coming closer. service thathelpsthe rich organise theirlives, isexplaining a shift It is not as though the rich

in the way that money is raised for charity. These days a kicka- have stopped buying stuff. The

, + bout with David Beckham, or perhaps a cycling trip fr*enice average owns $6m- to Rome, would be more effective: “It’s about the bragging rights worth of luxury goods, not to ofdoing something others can’t do,” he says. mention yachts worth $22m, ac- If sophisticated consumers are shifting their preferences cording to Wealth-X, a research from handbags to handlebars, makers of luxury goods need to firm founded (and later sold) by pay attention. The rich set trends, and their notions of luxury Mr Leppan. But increasingly trickle down. European consumers now “put more value on in- such purchases form part of an ward things”, Mr Elliot thinks. Revenues of upmarket hotels this experience. In the video Mr Law year are expected to grow by 9%, four times the rate of luxury- needs a new made-to-measure goods sales. Even the Chinese are tilting a bit from having to be- suit for the dance that will win Energy January 17th ing: during this year’s Golden Week, an autumn season of con- him the bet on the boat. Savoir Universities February 14th America’s Hispanics March 14th centrated consumer frenzy, the number of transactions in shops Beds, a British firm, is making a Family companies April 4th was 30% up on last year but that in restaurants and hotels rose by rotating bed for the new owner 52%, according to UnionPay, a payment-card company. of a French château so that he What qualifies as an experience people are prepared to pay can enjoy the view both of the for is also changing, to something more elaborate, more private surrounding countryside and of and sometimes even stripped almost bare of conventional com- the fireplace on the opposite forts. David Leppan, a South African-born millionaire, is not wall. Sellers of less bulky luxu- much interested in conventional luxury, but reckoned that a re- ries who make bespoke products for their best clients often add cital by Plácido Domingo at Seville’s Alcázar palace, arranged by events to their offering. Ferragamo, the Italian shoemaker, NetJets, a firm that hires out private planes, was “pretty much treated its favourite Chinese customers to a trip to its workshop priceless”. Mr Elliot’s colleagues at Quintessentially cite the Ant- in Florence. arctic Ice Marathon as the sort of activity its clients appreciate. Swish hotels nudge guests away from the familiar to the authen- Make it special tic. “Luxury can be the absence of strawberries in wintertime,” Most consumers are not in that league. More than a third of says Frank Marrenbach, who runs the Oetker Group’s chain of luxury handbags sell for less than €500. The ranks of people hotels. His chefspreferto offer seasonal fruit. who covet such goods are destined to grow; once hooked, they In a YouTube video for Johnnie Walker Blue, a top-of-the- will trade up. Globally, McKinsey expects the number of big-city range whisky, two friends (played by Jude Law and Giancarlo households in emerging markets with incomes of more than $70,000 a year to treble by 2025. Makers of luxury have come to realise that the paradox of industrial craftsmanship can be pushed only so far. To captivate new clients and keep the older ones on board, brands will have to invest shopping with a sense of occasion and give ordinary customers some of the individual attention they have lavished on theirbiggest-spendingones. Increasingly, thatiswhat theyare doing. When Burberry launched a perfume in September, it gave customers a chance to inscribe bottles with their own initials, both in shops and online. Consumers still want to hearthe story that luxury tells, per- haps more than ever as the world comes to seem more rootless and mass-produced. In London’s Savile Row a small crowd of men and women, nattily clad in mid-20th-century garb, recently staged a demonstration against two shops selling clothes by Ab- ercrombie & Fitch, an American fashion chain. “Give Three-Piece a Chance,” demanded their placards. To the demonstrators, the intruder was the antithesis ofSavile Row’s made-to-measure tai- loring. “We’re not proper Savile Row-type people,” said the prot- est’s organiser, Gustav Temple, who edits an obstreperously nos- talgic magazine called The Chap. “But we hope to be one day.” Just for you and me The ofTrang Tien Plaza would understand. 7

10 The Economist December 13th 2014